If one security has a greater risk than another security, how will investors respond?
A) They will require a lower rate of return for the investment that has greater risk.
B) They would be indifferent regarding their expectation of rates of return for either investment.
C) They will require a higher rate of return for the investment that has greater risk.
D) None of the above.

Question

Quizplus · Accepted Answer

Investors will require a higher rate of return for an investment with greater risk to compensate for the additional risk they are taking on. This is due to the principle of risk-return tradeoff - investors need to be compensated for taking on additional risk.

If One Security Has a Greater Risk Than Another Security